Refuge From Legal Battle Spurs Best Bond Rally: Argentina Credit

Arcos Dorados Holdings Inc., the world’s largest McDonald’s franchisee, got 52 percent of its total revenue from Brazil in 2011, compared with about 14 percent from Argentina and 6 percent from Mexico, according to company filings. Photographer: Paulo Fridman/Bloomberg

March 12 (Bloomberg) -- Argentine companies are beating the
government in the bond market by the most in 2 1/2 years as
investors favor securities that won’t be ensnared by the
nation’s legal dispute over defaulted debt.

Speculation that Argentina might lose its appeal of a
ruling and be forced to default for a second time since 2001
pushed its average dollar borrowing costs to 14.8 percent on
Feb. 28, 3.95 percentage points over yields for Argentine
businesses, the biggest gap since August 2010, JPMorgan Chase &
Co data show. After trailing sovereign debt in 2012, the
nation’s corporate notes have gained 6.9 percent this year, the
most among major emerging markets in JPMorgan’s CEMBI Broad
index. Argentine government debt has plunged 10.8 percent.

While Argentine company yields remain the highest in Latin
America, the improved performance reflects the possibility that
any U.S. appeals court ordering President Cristina Fernandez de
Kirchner to pay holdout creditors $1.3 billion wouldn’t affect
companies’ ability to meet debt obligations. Companies from
Industrias Metalurgicas Pescarmona SA, the largest investor in
Latin American wind energy, to Pan American Energy LLC, the
nation’s biggest oil exporter, are leading the advance in
Argentina.

“The market believes corporates are more willing to pay,
and with Kirchner it’s a question mark,” Dorothea Froehlich,
who helps oversee $3.9 billion at MainFirst Bank AG, including
Argentine corporate bonds, said in a telephone interview from
Zurich. “It’s easier to judge this question.”

Sovereign Losses

Argentine dollar-denominated notes issued as part of the
country’s debt exchanges in 2005 and 2010 have lost the most
among 55 developing nations in JPMorgan’s EMBI Global index this
year. On average, emerging-market sovereign debt has declined
1.97 percent.

The Second Circuit Court of Appeals in New York is weighing
Argentina’s arguments against a lower court ruling forcing the
government to pay holdouts, including billionaire Paul Singer,
from its 2001 default on $95 billion of debt in full before or
at the same time as it pays holders of restructured bonds. In a
hearing on Feb. 27, an attorney for Argentina said the country
would opt to default if the judges don’t accept an alternate
formula for paying investors who shunned the two restructuring
offers.

‘Natural Hedge’

Companies that depend on revenue from outside Argentina,
such as Arcos Dorados Holdings Inc., the world’s largest
McDonald’s franchisee, and real estate company IRSA Inversiones
y Representaciones SA, are among the better investments in the
corporate debt market, according to Greg Saichin, who helps
oversee about $207 billion as head of emerging market and high
yield portfolio management at Pioneer Investment Management in
London. Access to foreign currency has been restricted since
Fernandez began her second term in October 2011.

“There is a natural hedge there,” Saichin, who holds
Argentine corporate bonds, said in a telephone interview. The
price volatility caused by developments in the sovereign’s legal
battle is likely “providing whoever is looking at these
opportunities with a lower entry point.”

Arcos Dorados, based in Buenos Aires, got 52 percent of its
total revenue from Brazil in 2011, compared with about 14
percent from Argentina and 6 percent from Mexico, according to
company filings. The yield on the company’s dollar bonds due
2019, which are rated two levels below investment grade by
Moody’s Investors Service, is 6.09 percent. That compares with
average borrowing costs of 10.46 percent for Argentine
companies, according to JPMorgan’s CEMBI Broad index.

Lipstick Building

Dollar bonds due 2020 for Buenos Aires-based IRSA, which
has a 49 percent stake in New Lipstick LLC, the owner of the
Lipstick Building in midtown Manhattan, have returned 7.8
percent this year. The company’s sales in the quarter ended Dec.
31 jumped 48 percent from a year earlier to about 801 million
pesos ($158 million), according to data compiled by Bloomberg.

Industrias Metalurgicas Pescarmona, known as Impsa, the
maker of wind and hydroelectric turbines, has handed investors
in its 2020 bonds 12.8 percent this year, the biggest gain in
JPMorgan’s index of Argentine corporate debt. Buenos Aires-based
Pan American Energy has returned 9.7 percent, according to data
compiled by Bloomberg.

Argentina’s corporate notes trade less often than sovereign
debt and are harder to sell should Fernandez continue to tighten
regulations and keep dollars from leaving the economy, according
to Diego Ferro, who helps manage more than $500 million in
emerging-market debt at Greylock Capital Management LLC.

YPF Seizure

Fernandez, who uses reserves to pay debt obligations, will
do what it takes to pay investors, even if it impedes companies’
abilities to meet obligations, Ferro said. In April, Fernandez,
60, seized oil producer YPF SA from Madrid-based Repsol SA,
arguing that a lack of investment caused fuel imports to double
to $9.4 billion in 2011 from 2010.

“Corporates in Argentina are cheap and offer value, but
the whole Argentine regulatory system is difficult to pin
down,” Ferro, who owns some sovereign and provincial debt, said
in a telephone interview from New York. “After what they did to
YPF, I don’t think there’s any sacred cow there. I’d rather stay
with the liquidity and the risk of the people making the
decisions, rather than with the people suffering them.”

The cost to protect against an Argentine default in the
next five years based on trading in credit-default swaps fell
150 basis points, or 1.50 percentage point, to 2,823 at 12:44
p.m. in New York, according to data compiled by Bloomberg.

‘Extremely Cheap’

The extra yield investors demand to hold Argentine
government dollar bonds instead of Treasuries rose three basis
points to 1,160, according to JPMorgan. The peso weakened 0.1
percent to 5.0755 per dollar.

Institutional or long-term investors who understand
Argentine risk have been buying and holding onto the country’s
corporate debt over the past six months, said Jack Iles, who
helps oversee about $2 billion in emerging-market debt,
including Argentine corporate bonds, at Manulife Asset
Management. These investors are more comfortable owning those
notes for a longer period of time, he said.

“They’re very good companies, they make money, and they’re
cheap relative to the rest of the market -- extremely cheap
still,” Iles said in a telephone interview from Boston. “In a
diversified portfolio, you should own some of this stuff.”